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Professionalism/Bradley Birkenfeld, the UBS Whistle-blower

Bradley Birkenfeld is an American banker, formerly employed by a number of Swiss banks, including Union Bank of Switzerland (UBS) and Credit Suisse. He was the first banker to blow the whistle on the widespread tax evasion practices associated with international banking when he cooperated with the Senate, the Department of Justice, and the IRS between 2007 and 2009. Birkenfeld rose to fame when the IRS awarded him $104 million dollars as part of their Whistleblower program for his involvement in their investigation of tax evasion by Americans, which was facilitated by off-shore banks such as UBS. The award represents 26% of the tax money recovered from UBS, and is the highest whistleblower reward up to date [1].

The IRS collected over $5 billion in taxes and penalties, and marked a significant step in breaking the longstanding Swiss bank laws. Public confidence in the whistleblower program was shaken as Birkenfeld was sentenced to 40 months in prison for helping Americans evade taxes while still employed by UBS. In a 60 Minutes Interview, Mr. Birkenfeld’s lawyer, Steven Kohn, stated “the day he walks into prison is the day you will lose a generation of whistleblowers.... because no one will blow the whistle!” [2]

[4] "Rather than following most of his classmates into the military after graduation, a traditional track at Norwich, Birkenfeld went back to Boston and worked briefly as a bond trader. Then, after a couple of years, he decamped to Switzerland and stayed. He earned an MBA at the American Graduate School of Business, a picturesque little campus nestled between Montreux and Vevey in the Swiss Riviera."[5]

Birkenfeld began his career with State Street as a bonds trader in 1994. He was recruited by Credit Suisse in 1996, where he worked for two years. Subsequently, Birkenfeld moved to Barclay's Bank in 1998, working in their wealth management division. After two successful years at Barclay's, Birkenfeld was recruited by UBS and became a director for their wealth management services, responsible for the North American region[6].

In 2005, after his efforts to gain clarification on an internal UBS memorandum which explicitly prohibited activities in his job description were ignored and all other internal options had been exhausted, Birkenfeld quit his job at UBS [7]. Birkenfeld briefly worked for another Swiss wealth investment company, while he began to transfer incriminating evidence and other documents detailing the tax evasion practices he witness and participated in at UBS from Switzerland to a law firm in the United States. Birkenfeld had decided he would blow the whistle on off-shore banking. In 2007 he sought out the IRS to build a case against banks that facilitated tax evasion, especially UBS, and also to gain whistleblower status. Birkenfeld needed federal protection as a whistleblower to divulge the information that fell under Swiss banking laws. A messy affair followed, as the IRS would not grant him immunity without Birkenfeld providing them with specific information, which in turn, he would only provide under immunity. As a result, Birkenfeld ended his collaboration with the IRS and brought the matter before the Department of Justice (DOJ) and a Senate subcommittee tasked with the investigation of off-shore tax evasion practices by US citizens. The latter subpoenaed Birkenfeld, so could provide them with specific information of International tax evasion schemes faciliated by UBS[8][9].

Birkenfeld was charged by the IRS for assisting tax evasion on a large scale in connection with his largest former client Igor Olenicoff, a real estate billionaire who evaded over $7.2 million in taxes on over $200 million off-shore investments [10]. The IRS accused Birkenfeld of withholding important information on Olenicoff in their past discussions [11]. Meanwhile, Birkenfeld continued to cooperate with authorities as the key informant in their case against the Swiss bank. Although multiple investigators conceded that without Birkenfeld, the IRS and DOJ could have never been able to successfully mount a tax evasion case [12]. Birkenfeld was tried and sentenced to 40 months in jail[13]. Meanwhile, his client Olenicoff pleaded guilty to filing false tax returns, paid a substantial fine, and sued the UBS for giving him incorrect advice regarding his offshore tax claims.

After the verdict against UBS, 33,000 Americans admitted to undeclared overseas accounts, and most took advantage of the IRS Voluntary Foreign Account Disclosures program. The program allowed individuals to avoid public charges by repaying the evaded taxes plus interest. UBS was fined $780 million by the IRS and $200 million by SEC for their illegal operations in the US[14]. More importantly, a precedent was set as the US reached an agreement with Switzerland to reveal US client names specifically accused of tax evasion.

In 2012, Mr. Birkenfeld, was awarded $104 million dollars under a special whistleblower reward program instituted by the IRS. The award constituted 26% of the money collected from UBS by the IRS[15]. Senator Grassley says the potential for the IRS Whistleblower program “is tremendous” arguing that “billions of dollars are paid that would have otherwise been lost to major tax evasion” [16].

In 2013 the IRS awarded 122 whistleblowers a total of 53 million dollars after providing tips that led to the recovery of 367 million tax dollars [17]. Although this total is less than Birkenfeld's individual award, it is apparent that the whistleblower program has had a measurable level of success since its inception. While it is impossible to determine if Bradley Birkenfeld's actions provided the traction necessary for the program to take off, it seems he did set a positive example for the young program.

Bradley Birkenfeld's case brought the whistleblower program into the spotlight for the first tine. Since it was established in 2006 as a result of the Tax Relief and Health Care Act the, Bradley Birkenfeld was the first and most prominent example. This success went on to inspire other government agencies to follow suit. In 2011 The Securities and Exchange Commission (SEC) established their own whistleblower program and recieved 2,766 tips in the first year[18]. These changes will hopefully modify the culture in the financial industry overtime and create a more honest workforce focused on legal activity rather than profit.

Normalization of Deviance is the practice of accepting an action which by itself is not correct, but through habit, have accepted the action or lack of action as acceptable. Take for example the space shuttle Challenger that was doomed to tragedy by getting too comfortable with poor performing o-rings[19]. Over time these small deviations from acceptable risk levels combine to produce a disaster prone operating practice.

In the context of private banking, the industry set a general practice of a necessary "toxic waste" to fuel large profits of having US clients funnel money via non-U.S. regulated accounts - to the tune of 95% of all UBS accounts were undeclared.

According to Birkenfeld, he did not realize that UBS wealth management operations were illegal until 2005 when an internal document detailed the illegal nature of the practices [20]. At this moment Birkenfeld fully realized how far UBS had moved away from the safe operating norm and resigned. The difference between the daily operation procedures at UBS and the legal regulations outlined in the document mark a clear representation of Normalization of Deviance. Over the years the internal culture at UBS led to a point where these practices became standard operating procedure and undisputed.

The Bystander Effect is when in response to a decision, a group chooses to diffuse responsibility from themselves to the group, often taking no action, compared to an individual response.

With a large corporate structure whose bottom line was mainly fueled by large net worth individuals evading taxes on their investments, bankers felt as if the problem was out of their control. If banking practices were exposed, the size of the industry would make it highly unlikely that they would be exposed or personally need to address the problem. As it turned out, only Birkenfeld was jailed for his involvement in the tax evasion practice, mainly because he was the one to expose it. [21]

Under the supervision of an authority figure, individuals will cede responsibility for their actions to that of their supervisor despite their individual conscience of the actions they carry out. In 1961, Yale University psychologist Stanley Milgram set to determine the effect of authority and following orders inspired by the question of following orders three months after the trial of war crimes of Nazi Lieutenant Colonel Adolf Eichmann began. In his experiment, he discovered that individuals would continue actions as directed despite their own personal convictions against their actions.

In the context of private banking, individual bankers caved to directives from authority to land new high net worth individuals to the bank. With large demands, bonuses, and incentives, bankers felt that they had "no choice" but to keep doing "their job" or else be replaced by someone else who would.

Cheryl D. Eckard of GlaxoSmithKline was awarded then-record $96 million in 2010 eight years after her involvement in 2002 to reveal to GSK a serious contamination problem in GSK's Cidra, Puerto Rico plant. [22]

Samy Kamkar, an independent privacy and security researcher who blends the lines of ethical hacking, has had several efforts in whistleblowing.

After releasing a scripting worm on MySpace, pleading guilty to a felony of computer hacking, and losing access to a computer for 3 years, Samy demonstrated in 2008 the security weakness in NFC and RFID chips built into new credit cards.

In 2011, Samy uncovered a potential security flaw in the transmission of individual GPS and Wi-Fi information of mobile devices to their parent companies. This led to a Senate hearing over the efficacy of federal consumer privacy laws with technological advances. [23][24]

A licensed or credentialed member of a recognized profession: for example a physician, a lawyer, a professor, a clergyman, or a certified P.E. (Professional Engineer).

The opposite of an amateur: an athlete, actor, etc., who is paid for his or her work.

A dutiful and conscientious employee; for example, an employee who dresses appropriately and who is punctual, courteous and productive.

A plerker or a master of flow: one who works at one’s excellence such that work is play and challenges are matched with skill

Birkenfeld represents a mix of the professional definitions. On the surface Birkenfeld's actions were the first of its kind in the banking industry. Acting as a whistleblower in an industry riddled with accusations of fraud has been described as courageous. Underneath the surface we will never know Birkenfeld's true motivations for coming forward. Perhaps he saw it as a way to take revenge on UBS, or maybe he saw this as a way to save himself from future prosecution.

While it does not appear Birkenfeld was plerking while working for UBS as a private wealth management advisor, he did recognize his excellence. When he blew the whistle on the illegal activities of his coworkers and employer, Birkenfeld took a step towards "The Good". This decision to come forward was first met with jail time and criticism from many of his peers, but later he was rewarded financially. The financial freedom has given him the opportunity to master his flow and invest time and money into areas he is passionate, such as helping with the safety of his hometown Boston[25].

Overall Birkenfeld's story marks a interesting investigation for professional ethics due to the varying media perceptions of his actions. His tenure at UBS that ended with stories of smuggling undeclared diamonds [26] and ultimately imprisonment for his actions has sparked debates about the underlying ethics of his actions. Despite these rumors and suspicions, the fact remains that Birkenfeld stood up when nobody else would and set a precedent for ethical actions in the private wealth management industry.